Justice slams MS proposals for missing the point

Rebuttal dismantles Microsoft case

Analysis Whether Microsoft's lawyers are being forced to toe Microsoft's management line or are just not very good, we shall perhaps never know, but it is clear that the DoJ and States' legal teams are substantially out-lawyering their opposite numbers, as this week's "Plaintiffs' reply memorandum in support of proposed final judgment" shows.

The DoJ's response to Microsoft's six filings last week starts by noting that Microsoft's filing did not disagree that "The Court's duty at the remedy stage... is to fashion equitable relief that will (i) end the unlawful conduct, (ii) prevent the defendant from engaging in similar unlawful conduct in the future, and (iii) restore the possibility of competition in the market damaged by the violations."

The reorganisation would "leave Microsoft's assets intact but restructure them so as to remove the incentives that Microsoft now has to use those assets in anticompetitive ways to protect its operating system monopoly." The result would "lower the entry barriers Microsoft unlawfully raised, enhance competition, and foment an explosion of new innovation that will benefit consumers" and the proposed transitional conduct remedies would restrict Microsoft's interim ability "to further injure competition by committing the same kinds of violations in the future that the Court found it committed in the past". There would be no costly inefficiencies or burdensome regulation, or even harm to Microsoft's shareholders, the DoJ claimed. Microsoft would emerge with its assets intact.

DoJ says Microsoft missed the point

The DoJ points out that Microsoft failed to do what the Court charged it to do: "to make a proposal that addressed the violations the Court found. It did nothing of the sort. Instead, it offered a cosmetic remedy that would have virtually no competitive significance: It would neither undo the harm that Microsoft inflicted on competition nor prevent Microsoft from illegally using its monopoly power to inflict similar harm in the future." Contrary to the Court's findings from the evidence, Microsoft continued to claim that its conduct had no effect on competition, such as Navigator and Java.

The DoJ becomes rhetorical when it asks: "What remedy does Microsoft propose to undo the damage to competition caused by its past illegal conduct? Nothing." Microsoft just offers "unsupported speculation as to possible problems" of reorganisation that conflicted with previous statements by Microsoft. The DoJ says that its proposed remedy would sort out the applications barrier, stop Microsoft messing with new middleware threats, allow the two businesses to compete with each other, and restore competition.

Microsoft's proposals add up to business as usual. Microsoft didn't make any proposals that would undo its anticompetitive acts, and its proposed remedies would leave it free to carry on its unlawful conduct, the DoJ said: illegal tying for no technological reason, but just to suppress competition; predatory expenditure without an expectation of profitability to eliminate competition; retaliating against OEMs that did not obey Microsoft; seeking to divide markets by illegal collusion; and making connection to Windows "a jolting experience" for non-Microsoft software. It all adds up to the need for structural relief more than ever, the DoJ concludes, because Microsoft's proposed remedy is "neither serious nor sensible... [there is] no effort to restore competition... [or] preventing a recurrence of the illegal conduct."

Defects and misrepresentations in Microsoft's responses

Among the defects in Microsoft's filings, the DoJ identifies a gaffe by general counsel Bill Neukom about access to technical information by developers. Despite Microsoft's stated willingness to allow such access, it was only doing this for "selected APIs", the DoJ said. But at Microsoft's press conference immediately following Microsoft's filing, Neukom said that "This provision in the decree would essentially reaffirm and, if you will, codify the practice that Microsoft has always used... So this is consistent with what we have done."

Microsoft strongly criticises the reorganisation proposal, but the DoJ observes it does not suggest "any legal bar to the reorganisation but instead makes prudential arguments to the effect that the remedy is disproportionate and unnecessary to redress Microsoft's unlawful conduct".

It was not a good idea to try to misrepresent the Court as to what it had said in its Findings. "Microsoft repeatedly argues that the Court did not find a causal connection between Microsoft's continuing monopoly power and its many illegal acts" and it is true that the Court stated "there is insufficient evidence to find that, absent Microsoft's actions, Navigator and Java already would have ignited genuine competition in the operating system market."

But the Court went on to say, in the very same paragraph, that "it is clear, however, that Microsoft has retarded, and perhaps altogether extinguished, the process by which these two middleware technologies could have facilitated the introduction of competition..." The Court concluded that "Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits."

Microsoft misrepresents restructuring: it's not punitive and it is possible Another misrepresentation concerned Microsoft's assertion that the Court should reject the proposed restructuring because of legal guidance in the Areeda and Hovencamp treatise (the standard one on antitrust law). Microsoft quotes it out-of-context on "unconsummated exclusionary conduct" that "did not in any way impair the vitality, momentum or prospects of the rival." But the DoJ points out that this is "obviously inapplicable here in light of the Court's extensive findings about the significant adverse impact of Microsoft's consummated illegal conduct on Netscape, Java, Intel, consumers and innovation" and goes on to quote the next section on partial causation where "equitable relief beyond a mere injunction against repetition of the act is generally appropriate" and includes divestiture among the appropriate remedies. A&H also assert that: "a monopoly to which plainly exclusionary conduct appears to have made a significant contribution is itself unlawful".

The DoJ says that Microsoft is wrong to characterise the restructuring as punitive, since it is the least burdensome way of achieving the objectives, and apart from three shareholders [Gates, Ballmer and Allen], shareholders will own shares in both companies. There is of course a punitive element, but it is to Microsoft's pride. Microsoft has also tried to claim that the law concerning its illegal behaviour was "unsettled". Not so, said the DoJ, quoting a key case and noting that the Supreme Court and other courts had repeatedly articulated the principles. Nor is the remedy "unprecedented" for non-merger cases, as Neukom had been claiming, and the DoJ cites a number of cases, including Standard Oil, AT&T and United Shoe - and in the latter case, conduct remedies were not effective so breakup was imposed.

Microsoft's claim that a "unified" company cannot be split up is blown because the DoJ cites many instances of Microsoft itself admitting to consisting of and acting as separate OS and applications divisions with little interdependency. Microsoft claimed that "technology transfers across organisational lines are a routine practice at Microsoft" but outside the litigation context, Microsoft says that such transfers are rare, unpleasant, and only at the direction of Bill Gates. Two favourable studies of Microsoft's management have examples of how Microsoft functions as two organisations, with the authors of Microsoft Secrets noting that "Bill Gates insisted to us that Microsoft's 'dominant organisational theme is by products'". Furthermore, on the Microsoft campus, applications developers are physically separated in the more modern northern part, with a road in between.

The author of The Microsoft way noted that "whenever [facilities managers] studied the patterns of actual face-to-face communications [between Windows and applications developers], they invariably discovered that developers never seemed to venture more than a few feet from their own offices. The daily cross-fertilisation of ideas among groups was not evident." The final straw was CFO John Connors telling a Piper Jaffray conference earlier this year, referring to the fact that reorganisations took place about every two years and not in an antitrust context, that "Reorganisations are expected around Microsoft." Last year former vp Brad Silverberg emailed: "there are three things you can count on in life at msft: death, taxes, and another reorg."

And then there's Steve Ballmer, who said in April in a speech at George Washington University about the key to success of Microsoft with the PC, which was "a whole different industry structure. A structure, which still is maintained today. A structure of specialisation. You have chip companies, you have communication companies, you have systems software companies, you have applications companies. People tend to specialize. Now, we've been called out because we participate in two sectors of those, but, heck, it's still a very specialised business."

So far as the fragmentation of Windows is concerned, the DoJ points to Edward Felten's comment that "Microsoft itself precipitates fragmentation of its platform by continually updating various portions of the Windows installed base with new APIs" and by permitting users to remove some 80 different "components" or products from Windows 98. Since the DoJ did not propose that Microsoft be split into competing Windows companies, the fragmentation of Windows argument is merely a canard.

These are not isolated examples, and there can be little doubt that Microsoft's legal team is hoping that a lazy judge might accept at least some of Microsoft's misrepresentations. However, on past form, it is unlikely that Judge Jackson will step on the mines that Microsoft has left around, and the DOJ has done a good job on refuting Microsoft's false claims.

Porting MS Offic

The DoJ picked up the glaring error in Microsoft's argument that it would not be a simple task to port MS Office to Linux "because Linux does not provide system services analogous to those in Windows on which Microsoft Office relies". The DoJ response was scornful: "Of course Linux does not use the same system services as Windows; it is a different operating system from Windows. That is true with the Macintosh as well, yet Microsoft offers a full-featured version of Office for the Macintosh." A reason for Microsoft's concern, written before WordPerfect was ported to Linux, was included in an internal email from Silverberg in February 1999: "someone's going to do a decent office package for Linux. And someone's going to do a decent web-based solution. and when they do, watch out."

Point by point, the DoJ responds to the minutiae of Microsoft's filings, dealing with Microsoft's objections to restrictions on collaboration between the two companies, and the transitional conduct requirements. So far as Microsoft's desire to extend the case is concerned, the DoJ says it is "a transparent effort to delay the determination and implementation of a remedy for its illegal acts as long as possible. Microsoft suggests that this Court should select a remedy first and then set a hearing schedule accordingly, with ever more burdensome discovery and more distant hearing dates as the selected relief becomes more significant. Meanwhile, Microsoft's ongoing harm to competition and consumers would go uncorrected, and Microsoft would continue to enjoy the fruits of its illegal conduct while further raising entry barriers and entrenching its monopoly. Microsoft's violations have been established. Liability is not in doubt, and relief should be as prompt as possible. Having refused to engage effectively on the merits of plaintiffs' remedy, Microsoft should not be permitted to deprive it of force by pointlessly delaying its implementation." There's no comfort to be had from the partial participation by Ohio and Illinois, since a footnote says that they "are in full agreement [and] that the delay sought by Microsoft is excessive".

Microsoft's failure in its defence has mostly been the expectation that it could get away with the same kind of misrepresentations that it makes in its product announcements. It does take some work to root out the fallacious arguments, but the DoJ has done this rather well in this filing. The SS Microsoft is steaming towards the clearly-visible iceberg as though it didn't exist. ®